Jeffrey Bender, executive managing director and principal with the Cincinnati office of Cassidy Turley, has some good news: Larger-scale deals are returning to the Cincinnati market. Bender explains why in this guest column for Midwest Real Estate News.Guest column in Midwest Real Estate Journal by Jeffrey Bender, SIOR, CCIM

The overall vacancy rate for the Cincinnati industrial market crept downward from 10.36 percent in the previous quarter to 9.98 percent, with all four quadrants experiencing a downward trend in their vacancy rates from the previous quarter. Leasing activity along the Interstate-75 corridor led to declines in the vacancy rates for bulk buildings in the Northwest and Northern Kentucky quadrants.

A continuing positive sign was the Cincinnati Purchasing Managers Index of 61.0 in September, up from 59.3 reported in August by the Cincinnati Report on Business from the Institute for Supply Management – Cincinnati and the University of Cincinnati Economics Center. Indexes that are higher than 50 indicate that a region’s manufacturing activity is expanding, and the Cincinnati region has maintained an index above 50 for more than 21 months. More good news came from the U.S. Bureau of Labor Statistics, with the Cincinnati MSA ranking fifth in the United States in the number of manufacturing jobs gained (5,100) in one year since August, 2010.

The third quarter saw the return of large new lease transactions, with eight above 100,000 square feet. Swimoutlet.com’s 390,000-square-foot lease in the Port Union Commerce Park – East bulk building in West Chester was the largest since the second quarter of 2010. Other major transaction included:

Both Clarion Partners and Exeter Property Group executed industrial portfolio purchases that included properties in the Cincinnati market. Timing in the market has spurred both buyers and sellers. Inland American recently put the 970,000-square-foot bulk building in West Chester occupied by Cornerstone on the market for $55 million.

Regarding new supply, IDI started to move dirt on a 550,000-square-foot speculative building in its Monroe Logistics Center in Monroe, Ohio. This is the first bulk building to break ground since 2009 when a 721,000-square-foot building was completed in the same industrial park. Verst Group Logistics broke ground in July on a 200,000-square-foot expansion that would double the size of its bulk facility on Gateway Boulevard in Hebron, Ken. And, more than 1 million square feet will soon return to the Northwest quadrant when Dell/Ceva Logistics closes its 428,000-square-foot facility on Windisch Road at the end of this year and Liz Claiborne vacates its 600,000-square-foot building on Jacquemin Drive in 2012. The Jim Beam plant on Paddock Road will close at the end of the year, adding 278,000 square feet of vacant space to the Central quadrant.

The newest industrial park in the region, Sharonville Commerce Center, one of the more successful land development sites during the recent recession and located near Interstate-275 and Commerce Boulevard, is adding two more facilities, a 127,000-square-foot building for USUI International Corp. and a 28,000-square-foot project for Gem City Tire. Kanefusa, Japan’s largest manufacturer of high quality industrial tools, has commenced site work on its new 25,000-square-foot build-to-suit near the Cincinnati/Northern Kentucky Airport.

While the decreasing vacancy rate is positive news, the additional inventory both from a few large buildings closing operations and the first speculative building in a few years is also needed. Many of the larger Class-A modern bulk distribution centers have landed tenants, albeit at Class-C pricing. In any recovery, it is very typical that the product leased or sold occurs in order of most attractive to least attractive (not just in terms of aesthetics but function).

So, Phase I of the recovery has already occurred. Phase II will see Class-B product leasing also at Class-C type rates, although certain areas or buildings will be able to begin holding firm due to a lack of alternatives available. Finally, the Class-C product will begin to be absorbed. It is not expected that this product will be hit as hard on lease rates, as a lack of supply and alternate product will put upward pressure on rates. Phase II will occur throughout the first three quarters of 2012, with Phase III immediately following.

New construction, while soft in 2011, is expected to remain depressed through 2012 with no substantial recovery occurring until 2013.

Forecast

Economic growth should continue for the region. The pace, however, will be sluggish as companies remain financially cautious and job growth remains soft.

The lack of “new-to-the-market” tenants will keep landlords scrambling for the local credit-worthy tenants.

The Northern Kentucky and Northwest quadrants are expected to lead the region in recovery because of their strategic locations along the Interstate-75 North-South transportation corridor.

Land prices are as low as witnessed in the past 20 years, so if you are considering constructing a new building in the future, buy now.

Investment interest will remain stable as pricing in Tier-1 markets has already pushed many investors in search of higher returns here and to other Tier-2 cities like Greater Cincinnati/Northern Kentucky.